Generally, trading binary options includes predicting the upward or downward direction of an underlying asset. This type of trading basically leads to two possible outcomes – win or lose. For a trader, it is crucial to understand the basics of trading binary options prior to beginning trading itself. Binary trading differs completely from conventional options. The list of those differences includes risks, fees and payouts.
Regardless, whether you are planning to speculate or hedge, binary options represent a very impressive alternative for assets predictions. The target of this article is to explain the trading process of binary options in simple steps and assist to all traders in taking the right decisions. So, get ready for some lecturing.
All types of contracts have got three main characteristics that traders should properly understand and learn. Expiry time: represents a period between the purchase of the option contract and the moment when it closes already. That time period can have different values from 1 minute up to 1 month. Generally, majority of traders aim for the short-term options, which can last 60 seconds and up to 30 minutes. Strike price: represents the price, which enables call or put option to be executed. For example, the current price of gold is $1,500, while the winning trade results in return equal to 80%. Likewise, you decide to place an “up” bid of $100. Hence, once the contract is closed, and the gold increases in price, then you receive your bid of $100 and additional 80% of the amount you’ve placed. In this situation, by the end of the trade you will receive $180. In situation when your prediction is wrong, you lose the entire amount of $100 that you’ve bid in the option.
Payout offer: represents a return, generally expressed in percentage, which is offered by the broker to traders. In the example above with gold, the offer was containing 80% extra in case of a successful trade. The max amount that you can potentially lose is actually limited to the invested amount. However, certain traders may come up with an offer of 10% for a loss. As an experienced trader, you will be able to distinguish, know and understand those percentages before bid placement.
Earlier, there existed only one trading platform for traders dealing with binary options – high/low platform, which is also known as “call/put” or “up/down”. The increase of public interest in this binary options trading has resulted in appearance of new options. High/low: the most common and basic platform, which is based on choice of scenario where the stock price goes up or down prior to the expiration of time. Turbo: same concept with high/low option, but in this case the expiration time begins from 30 seconds. Turbo options have the highest expiration time period of 5 minutes. This trading type is deemed as illegal in all European countries as well as USA due to high risk. However, majority of traders prefer this option because of the chance to earn high profit within a very short time period.
In case of binary options, the risk gets limited to the amount that is being traded. This amount can even start from $1. In case if you lose, you either lose the traded value, or a certain percentage of it based on the offers from broker. Hereby, prior to trading it is highly advised to spend a lot of time for learning and evaluating the possible risks, as well as never forget to apply the price action to make proper decisions. That’s the reason why technical analysis indicators are really well-known among diversified traders. Various strategies can be applied depending on particular situation you are involved in. The straddle trading strategy – is one of suitable methods to properly manage and address the arising risks. Basically, it is perfect for well-experienced traders, who are already able to pin-point the short-term trends of the market. It is also advised to properly understand the patterns of candlestick chart in order to improve the distinguishing of the conditions of market prices as well as the direction, which those prices are more likely to follow.
Basically any kind of investment comes with associated risks as well as rewards. Likewise, it is very useful to properly understand binary options prior to making any decisions. After reading and properly understanding the basics of trading binary options, you will be able to develop a good understanding of the basis of their performance. It is advised to use demo accounts initially to practice and understand the trading market, as well as fully utilize the analysis tools available to make the most efficient decisions, while keeping the track of the trades you make. In case of any question, please feel absolutely free to contact us anytime.